Telecom Winners are Likely Local

It is not yet time to bury the telecommunications industry.

Despite AT&Ts latest financial woes, despite the DSL carriers bankruptcies and regardless of shrinking capital expenditures, some carriers are still growing revenue, expanding networks and even raising money, if necessary. There are more than a few companies that promise to survive this seasons drought.

Allegiance Telecom, Focal Communications, McLeodUSA and Time Warner Telecom are listed repeatedly by securities analysts and market researchers as likely winners. Add to them Yipes Communications, the Gigabit Ethernet carrier; Global NAPs, a Northeast data carrier; and several fiber-optic networks backed by utilities.

Sound finances are obviously important, and most of these companies seem to have enough money to keep them going, or are backed by rich parents. The common thread appears to be this: Companies building local franchises have a better chance of succeeding than companies looking to become national carriers.

Though none of the companies mentioned above are profitable at present, some analysts are willing to take the long view on earnings for smaller telephone companies. “People tend to forgot that it took MCI 20 years to become profitable,” said John Bain, a senior vice president at Hoak Breedlove Wesneski & Co., a Dallas brokerage.

National policy says there must be local competition, and the new Tauzin-Dingell legislation is an indication “this will happen one way or another,” Bain said.

Financial markets have dried up, but WorldComs $12 billion bond sale last week and smaller deals earlier this year by XO Communications and McLeodUSA prove that money is available, he said.

John Page, an analyst at Moodys Investors Service, was less hopeful that competitive local exchange carriers (CLECs) will be able to tap the markets. “The real issue is funding and, for this market, it is virtually dried up. A lot of these companies are dependent on funding this year or next year.”

The existence of that funding gap is open to debate, Page admitted.

Broadwing, a company formed by Cincinnati Bell after it bought long-distance carrier IXC Communications in 1999, is not a CLEC; it is “bulletproof” because of Cincinnati Bells local exchange franchise, Bain said.

VarTec Telecom, a Dallas company that has focused on the residential market, is branching out to business customers after acquiring Lightyear Communications. It is planning to roll out a CLEC offering for both business and residential customers.